Brexit Spells Bad News For Automakers, But Some See Liberation, Not Disaster

Britain’s automotive manufacturers are almost 100% in agreement that Brexit is a bad idea that should be stopped but probably won’t be, and will inevitably mean a rocky path to oblivion for those making cars and SUVs in the U.K.

They worry that when Britain leaves the EU, as it almost certainly will if the Conservative Party wins the general election on December 12, the industry’s current free trade access to EU markets will be disrupted, and the free movement of components back and forth along complex supply chains will be slowed or blocked, ruining the finely turned economics of their operations.

But experts from outside the industry often see the automotive manufacturing industry’s future in a radically different light. They point to the fact that a huge section of the industry successfully and profitably sells vehicles outside the European Union (EU) free trade zone. And counter-intuitively, many countries, the U.S. for example, have a more successful record of selling into the EU over a 20-year period with a 10% tariff, than Britain has from inside the free trade zone.

Opinion polls currently predict a solid Conservative win. Investors are wary though because 10-days before the 2017 election, polls predicted a similar verdict, but the Conservatives lost their overall majority. If Britain does leave the EU formally on January 31, 2020, as the Conservatives plan, a free trade deal still has to be negotiated. The Conservatives say if there is no agreement by the end of 2020, Britain will leave without a deal and trade, at least initially, on World Trade Organization terms which include a 10% import tariff.

If the Labour party wins, or there is a hung Parliament where no party has an overall majority, Britain’s exit from the EU is probably going to be at least delayed, or possibly thwarted completely.

Professor Ferdinand Dudenhoeffer from the Center for Automotive Research at the University of Duisberg-Essen in Germany is firmly in the negative corner, saying Brexit spells doom for the British industry.

“I think Britain and the British people have made the wrong decision and that means the industry will go down and down and down and in the longer term there will just be BMW’s Rolls Royce, and just two carmakers Jaguar Land Rover and BMW’s Mini,” Dudenhoeffer said.

Currently, Britain hosts big car factories from Toyota and Nissan, while Honda recently announced it was pulling out in 2021, but not because of Brexit. Japan and the EU recently signed a free trade deal, so this might mean the Japanese British presence comes under scrutiny. Vauxhall, now a part of PSA Groupe, operates a big plant at Ellesmere Port, near Liverpool. PSA CEO Carlos Tavares has said this plant might be shut if Brexit makes it impossible to make a profit. There are also specialist vehicle makers like VW’s Bentley, Aston Martin, McLaren, and Lotus.

Dudenhoeffer doesn’t expect the EU to offer Britain a free trade deal.

“I don’t expect a free trade deal, after all, the Brits decided to leave. They will be handled in the long-term like any other outside country like Switzerland and Norway. There might be agreements to help the supply chain work better, but even so it will be difficult for suppliers to plan. There might possibly be a better future, but at the moment, I can’t see it,” Dudenhoeffer said.

Michael Burrage, from Economists for Free Trade and a senior research fellow at the Civitas think-tank, said Brexit will present no real problem to the British auto industry, and has some interesting data from the Office of National Statistics to back this up.

Burrage says despite being in the EU’s Customs Union and Single Market, U.K. goods exports to the EU grew just 0.3% in real terms over the past 20 years. But exports to non-EU countries have grown over 10 times faster, by 3.2% per year.

In the automotive industry, the compound annual rate of Britain’s export growth to the EU since 1999 was just 0.7%, while imports rose 3.2% for a 2018 deficit of 28.5 billion pounds ($37.5 billion). Exports outside of the EU mainly on WTO terms and mostly luxury vehicles, rose from 7.9 billion pounds ($10.3 billion) 20 years ago more than 10 times faster than exports to the EU, producing a surplus of 15.9 billion pounds ($20.7 billion) in 2018.

“Leaving with no trade deal would provide an opportunity – and the strongest possible incentive – for the government to devise and implement trade and fiscal policies that build on the UK’s remarkable success when trading under WTO rules,” Burrage said.

Patrick Minford, Professor of Applied Economics at Cardiff Business School, doesn’t doubt there will be big challenges for the auto industry outside of the EU, but expects it to survive and thrive.

Minford said there will no problems negotiating a free trade deal with the EU because it really amounts to simply consolidating what already exists. The idea this will take from 5 to 12 years, as some Remainers have insisted, is ridiculous according to Minford.

The industry will have to raise productivity because it will no longer be able to hide behind the 10% tariff barrier provided by the EU, but Minford is pretty sure it can do that. The industry won’t welcome having to improve efficiency but the likes of Jaguar Land Rover already manage to do this very successfully, but now they will be able to source components not just from the EU but also the rest of the world.

“Prices will come down in the home market as we sign free trade agreements; that’s the key point. How firms react to that is up to the market place and their decisions. I can’t predict what they will do. Whoever stays will have to be more productive,” Minford said.

Peter Wells, Professor of Business and Sustainability at Cardiff Business School, doesn’t view the future outside of the EU with much enthusiasm, but says before the referendum in 2016, Britain’s auto industry was weakening.

“The future of the U.K. automotive industry is particularly bleak because the decision to leave the EU, with all the economic uncertainty and probable added cost entailed, comes at a time of massive and rapid technological and business convulsions sweeping through the industry,” according to Wells.

Wells said even before the exit decision it was clear that the U.K. was becoming too expensive to compete in the lower margin segments despite good quality and productivity. Britain’s auto industry may return to pre-EU conditions where, as imports become more expensive and as exports become more difficult, U.K. output may focus on the home market. This might work if cars become more of a commodity and less of a status symbol.

The long-term future for the industry is more likely to be a smaller domestic industry producing high-margin vehicles, Wells said.

David Bailey, Professor of Business Economics at the Birmingham Business School, said a “hard” Brexit would devastate the industry. “Hard” Brexit is shorthand for leaving without a free trade deal and having to fall back on WTO tariffs.

“A hard Brexit would be nothing short of catastrophic for the U.K. car industry. Output will fall, jobs will be lost and – in my opinion – plants will close. U.K. auto needs a Brexit deal that secures free and frictionless trade with Europe, unrestricted access to the single market and the ability to hire skilled employees from overseas,” Bailey said.